What they also fail to see is that the outputs of this process are also the inputs of this process. Imposing artificial scarcity on the output restricts the input, which diminishes the output, which further affects the input, etc.
Every piece of intellectual output takes as input many, many pieces that have come before.
That's a great point. The truly great works motivate derivative works and copyright doesn't play well with this. No work exists in a vacuum so locking up lots of our culture behind copyright will limit the space of ideas pursued. I've read that book publishers won't even allow quoting from other books without permission from the publisher (they don't trust fair-use).
Still, many of the other inputs: the time of lots of people (many of them very talented) and the money of investors are definitely scarce. I think it's a tricky balancing act. However, I'm not sure the status quo is so terrible. By getting permission or paying, many copyrighted works can be used in new works. In cases where they can't some works may not be created. Along the way, creators can be compensated.
Every piece of intellectual output takes as input many, many pieces that have come before.